The Federal Reserve held interest rates at 3.5 to 3.75 per cent following Kevin Warsh’s first meeting as chairman of the Federal Open Market Committee. The decision was unanimous. Warsh replaced Jerome Powell, who was pushed out by President Trump. Inflation is running at 3.8 per cent — a three-year high — driven in part by energy costs that spiked following Iran’s closures of the Strait of Hormuz. The FOMC’s so-called dot-plot projections revealed that nine of the eighteen participating members now expect a rate hike before year-end, eight expect rates to stay unchanged, and only one projects a cut. Warsh simultaneously announced five task forces to review the Fed’s communication strategy, balance sheet size, use of economic data, productivity-jobs framework, and inflation management approach. Trump’s response to the hold was characteristically opaque: “It’s alright… whatever.”
The received wisdom
The progressive-Keynesian reading of the Warsh appointment has been consistent and not without foundation: Trump fired Powell because Powell refused to cut rates on political command, and Warsh was chosen as a more compliant replacement. The fear was that an accommodative Fed under political pressure would validate the pattern of central bank interference that has undermined monetary credibility in Turkey, Argentina, and other developing economies. On this reading, Warsh’s unanimous hold decision and the hawkish dot-plot are an agreeable surprise — the Fed is doing its job, resisting political pressure, and maintaining its commitment to the 2 per cent inflation target. The shorter FOMC statement, trimmed from 350 words to 132, is presented as welcome simplicity rather than a warning sign. The five review task forces are characterised as a prudent institutional audit rather than preparation for structural change. And Trump’s muted “whatever” is taken as a sign that even he has been domesticated by institutional reality.
A different read
The reassuring story misses several things that deserve more scrutiny.
The first is sequencing. Warsh was appointed by a president who was explicit about wanting lower rates. He held rates this cycle — but nine of eighteen members are already projecting a hike. That is not a central bank straining to cut; it is a central bank whose membership is leaning hawkish in circumstances where the political principal wants loosening. Whether Warsh can maintain that independence when the pressure intensifies — as it will — is the real question, and his first meeting tells us little about it. Institutions held by one appointee tend to reveal their true alignment over several cycles, not one.
The second is the statement itself. The FOMC’s reduction from 350 words to 132, and Warsh’s elimination of forward-looking guidance, deserves more attention than it has received. Forward guidance — telling markets where rates are likely to go — has been a central pillar of Fed communication since the Bernanke era. The theory was that transparency reduced uncertainty and allowed businesses and consumers to plan. Critics, including Warsh himself, have long argued that it also created a hostage-to-fortune problem: markets priced in guidance, and any deviation became a shock. Removing it is not neutral. It reintroduces discretion and opacity at a moment when inflation is above target, the Strait of Hormuz is creating genuine energy price uncertainty, and market participants need anchoring signals. This is precisely the kind of environment where transparency has historically been most valuable.
The third point is Trump’s self-contradiction. The president said of rising inflation, in a statement that remains remarkable: “I love it. The numbers were great. You know what I really love? I love the inflation.” It is not entirely clear whether this was a rhetorical gesture or a genuine policy signal, but it is the kind of remark that, had it been made by any other leader, would have prompted immediate concern about political interference with monetary policy. The fact that it passed largely without comment is itself a measure of how normalised the abnormal has become.
The deeper structural concern is that the Warsh Fed is operating in a highly unusual macroeconomic environment. Energy price volatility tied to geopolitical disruption — the Hormuz closures — is different in character from demand-driven or wage-driven inflation. Raising rates to combat an energy supply shock is a blunt instrument that tends to suppress investment without resolving the underlying price pressure. This is precisely the dilemma that afflicted central banks in 1973-74, and later after the post-Ukraine energy shock in 2021-22. The rate hike projections in the dot-plot may reflect genuine inflation concern, or they may reflect uncertainty itself — neither of which is straightforwardly resolved by tighter money.
The five review task forces may well produce sensible reforms. Warsh is intellectually serious, and some of his critiques of the Fed’s communication architecture have merit. But launching five simultaneous reviews at a moment of elevated inflation and geopolitical stress is itself a form of signal — it suggests that the institution is in a state of deliberate flux, and that the current framework is considered inadequate. That is not always wrong, but it is rarely a source of the stability markets need.
What to watch
- The dot-plot trajectory at the September FOMC meeting — if energy prices stabilise, the nine-member hawkish contingent may soften; if Hormuz disruption continues, a hike before year-end becomes the base case.
- What the five review task forces actually recommend: changes to the inflation framework or the Fed’s communication practices would be significant and would likely generate considerable market volatility on announcement.
- Trump’s relationship with Warsh: the president praised him as “a very good guy” but expressed displeasure about potential rate hikes. If a hike materialises, the political pressure will intensify rapidly. Watch whether Trump’s statements move from cryptic to directive.
- Mortgage rates and the housing market: the spread between Fed funds and 30-year fixed rates has been unusually wide, and any further tightening signals will compound the affordability crisis that is already a significant political vulnerability for the administration.
— J